Is Real Estate Crowdfunding a Good Investment?
That is a tough question. I always like to keep it simple in my analyses (I know enough about statistics to hurt myself). But seriously, as I have gotten older, I really have moved to the “back of the napkin” approach (in addition to the normal banging my head into a wall).
I have started to just compare REIT investment returns to everything else “real estate”.
At the date of this article, the 4 crowdfunding platforms I am currently invested in (note that I only currently invest in first lien real estate loans (debt) on crowdfunding platforms) are returning the following (current yield on cost):
No Current Investments – Annual Earnings 6.6% – Cumulative Earnings – 12.4%
(13 total loans, 12 loans fully repaid, 1 loan “short pay” for a 12.8% capital loss)
The 12 loans fully repaid had an average 8.64% interest rate
Current Yield 8.39%
(166 different loans, 11 loans delinquent or in default)
Patch of Land
No Current Investments – Total Return 7.69%
(5 total loans, all loans fully repaid)
The 5 loans fully repaid had an average 10.2% interest rate
One Loan in Default – Total Return 4.4%
(3 loan investments, 1 loan “short paid” for a 44% capital loss, 1 loan in default with another expected short pay, 1 loan fully repaid)
Realtyshares has gone out of business and their loans have been taken over by a servicing company.
Ladder Capital Corporation
Stock Symbol (LADR)
Current Yield 9.424%
Commercial Mortgage REIT Common Stock
CorEnergy Series A Preferred
Stock Symbol (CORR PRA)
Current Yield 7.776%
Energy Infrastructure REIT Preferred Stock
Uniti Group SR Note 2023 Maturity
Current Yield 10.171%
Telecommunications Infrastructure REIT Senior Secured Bond
So if we slot this into a table based on yield, we get the following:
|Investment Name||Market||Description||Type||Capital Stack||Yield|
|Uniti Group SR Note 2023||Publicly Traded||Infrastructure REIT||Corporate Bond||Debt||10.171%|
|Ladder Capital Corporation||Publicly Traded||Commercial Mortgage REIT (mREIT)||Common Stock||Equity||9.424%|
|Alphaflow||Crowdfunding Platform||Mortgage Loan Index||Private Loans||Debt||8.390%|
|CorEnergy||Publicly Traded||Infrastructure REIT||Preferred Stock||Hybrid Debt Equity||7.776%|
|Patch of Land||Crowdfunding Platform||Real Estate Mortgage Loans||Private Loans||Debt||7.690%|
|Peerstreet||Crowdfunding Platform||Real Estate Mortgage Loans||Private Loans||Debt||6.600%|
|Realty Income||Publicly Traded||NNN Net Lease REIT||Common Stock||Equity||6.304%|
|Realtyshares||Crowdfunding Platform||Real Estate Mortgage Loans||Private Loans||Debt||4.400%|
Crowdfunding vs REIT Yield Comparison
From a yield standpoint, REITs appear to be the clear winner. The real estate-backed loan platforms had a higher initial interest rates on the notes, but the defaults drop their total returns due to having to carry non-performing notes for long periods (it can take 12 months or longer in certain areas of the country to foreclose on a property).
Also note, the Alphaflow portfolio’s duration was 1/3 or even smaller than the loans in the other three crowdfunded portfolios, which dropped the interest rate.
The top four are made up of 3 REIT investments and 1 Crowdfunded real estate loan platform. Of course I realize that some of the crowdfunding investments have a smaller amount of investments and may be “penalized” for defaults, but I want to keep this comparison simple and focus on what is actually happening in the portfolio.
It is important to also discuss the position in the “capital stack” of both the crowdfunded investments and the REITs in this example, as it affects investment safety.
The top 3 REITs come from 3 different places on the capital stack (in descending order):
Corporate Debt (UNIT Bonds)
Preferred Stock (CORR Preferred Stock)
Common Stock (LADR Common Stock)
What does “capital stack” mean?
The “capital stack” is the legal placement of all of the capital placed into a company how it is secured (either backed by an asset, or by equity investment for example). The highest placed position in the capital stack gets paid first before any lower position in the case of bankruptcy. As you move higher in the capital stack, your investments are safer, as they are in an earlier or more primary payment position in the case of default.
The Real Estate Capital Stack
In the real estate world, first lien mortgages are the top of the capital stack. If the mortgage is not paid, the lender can foreclose on the property. If there is money left over after paying the first lien mortgage note, then the remaining money is then passed down to the next position (maybe a second mortgage for example) to pay off that debt. This process is repeated down the capital stack until the money runs out. The equity holder is at the bottom of the stack.
The whole point of investing in crowdfunded real estate loans is that the property is backed by the real estate. You as the investor are acting as the “bank” and paying the crowdfunding platform to service the loan. You are safe only as long as the property can be foreclosed on and resold for more than the loan, plus all of the legal and resale expenses. If you aren’t able to sell the property for more than the value and the costs, you “take a haircut” (lose principal) as the investor.
Although the above loan portfolios have 14 loans in default, there is a good chance that I will receive the majority of my principal investment back due to the assets (the real estate) securing the investment.
The Corporate Capital Stack
For the sake of simplicity, we will break the corporate stack down into 3 sections:
Also known as corporate bonds, these are in first position in the capital stack and get paid back first in the case of corporate bankruptcy. Similar to a first mortgage on a piece of real estate, interest payments are fixed.
Preferred stock is a hybrid of equity (common stock) and debt (bonds). They are below bonds in the capital stack, and also pay a fixed interest rate.
Common stock occupies the lowest position in the capital stack. Income is paid in the form of dividends and is set by the company, and can be CHANGED at the discretion of the company’s management.
I find it interesting that the one crowdfunding platform that mimics REIT returns also mimics REIT structure. The Alphaflow portfolio represents 166 real estate-backed loans. REITs spread out their investments across hundreds and even thousands (in the case of Realty Income) of different properties. This has the effect of diversifying the portfolio and protecting returns, something that Alphaflow seems to have perfected in their case.
My issue with crowdfunding real estate loans (versus REIT investing) is the length of the investment duration and the illiquidity (you cannot get your money out) of the investment. In these debt deals, you don’t get your money until the loan is either repaid or the foreclosure and resale process is complete. In general, I want to be compensated at a much higher rate for illiquidity of my investment.
My Alphaflow portfolio has a WAM (weighted average maturity) of 4.69 months and I am getting 8.39% and am well diversified. I feel comfortable in comparing Alphaflow to that of a short-term asset backed bond and 8.39% return is great income at the time of this article.
I know is sounds like I go back and forth on whether investing in real estate crowdfunding is “good” or not, but I think it depends on your particular situation. I believe it is important to diversify across asset classes and also across the capital stack. I invest heavily in real estate businesses and I want the income streams from these real estate businesses to be diversified across:
- Direct Rents (properties I own and manage)
- REIT dividends (common stock REIT investments)
- REIT Interest payments (REIT preferred stock and bond interest payments)
- Direct Mortgage Notes (I hold the entire note)
- Crowdfunded Mortgage Notes (I take a small piece of hundreds of different notes)
I my portfolio, I have begun to “migrate” more of the capital from the other crowdfunding platforms to Alphaflow and high “capital stack” REIT investments. I find the income stream more consistent, and actually more protected with this approach.
Real estate crowdfunding is a good investment and income lever when slotted into a specific position your overall portfolio. It is a different type of investment versus a typical REIT. When approaching real estate investments, diversity is important, as well as access to your funds. Income (returns) typically gets smaller as the investment gets safer (as you progress higher in the capital stack).
Real estate-backed loans are safer (much safer than P2P loans), as they have an asset underlying the loan. If you watch the LTV ratio (loan-to-value ratio) and keep it 75% and below, you have a good chance at recouping your entire principal in the case of a default.
As an individual investor, it is up to you to do your own research and make your own investment decisions. I do not provide any form of investment advice and am only reviewing tools, platforms and other business ventures that I use, and sharing my experiences with these platforms along the way.